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Southwest, Boeing Spending $140m On 717 Conversion

Southwest Airlines says it will spend about $100 million to convert AirTran Airways’ Boeing 717s to Delta Air Lines’ livery and specifications before subleasing them to the legacy carrier, but Chairman, President and CEO Gary Kelly insists the expense is justified to eliminate all 88 of the 100-seat aircraft from Southwest’s fleet.

The cost is in addition to $40 million provided separately by Boeing.

“You might think of it as a volume discount we were willing to offer to induce our sublease customer to take those aircraft,” Kelly said July 19 during a conference call discussing Southwest’s second-quarter earnings. Southwest CFO Laura Wright added that Southwest expects a $200 million boost in annual pre-tax income from replacing the AirTran 717 service with 737s that accommodate 26 more seats at roughly the same trip cost.

Southwest also says the sublease income it will get from Delta is “essentially a wash” with its ongoing rental expense for the aircraft.

The low-cost carrier says it would have spent $50 million to reconfigure and repaint the 717 aircraft if it had kept them for the Southwest fleet. Instead, it signed a deal with Delta that will send three of the 717s to the legacy carrier each month, starting in August 2013.

Neither Southwest nor Delta is saying how the 717s will be reconfigured. Delta operates its mainline fleet with inflight Wi-Fi, two classes and economy comfort seating featuring extra leg room. AirTran’s 717s are equipped for Wi-Fi, which, like Delta’s, is provided by Gogo. The 717s also have two classes, but the business class on Delta will be different, and AirTran does not have rows of roomier economy seats, like Delta’s.

New interiors also seem likely.

Southwest says the 717 deal modifies the accelerated retirement schedule it had put in place for its 737 Classics, some of which will be used in place of the 717 flying. It did not provide specifics, but says it still will retire 40 Classics this year and get rid of the rest before they reach the end of their useful life.

The low-cost carrier made its 717 comments during a call discussing a 42% year-over-year increase in net income to $228 million. Operating profit more than doubled from $207 million to $460 million, even though U.S. airlines were not able to push through any systemwide fare increases in the quarter. Southwest says it achieved a record second-quarter profit of $273 million, excluding special items.

Revenue increased 12% to $4.6 billion on increases of 5.1% in traffic, 6% in yield and 5.6% in unit revenue. A 1.5% decline in fuel cost per gallon also helped the year-over-year comparison.

Kelly says the results include a “significant operating profit” from its AirTran subsidiary, which is a turnaround from second quarter 2011, although Southwest did not disclose a figure for this year’s quarterly profit. Southwest acquired AirTran in May 2011.